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Váradi, Kata Liquidity Risk on Stock Markets View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by Corvinus University of Budapest - Ph.D. dissertations VÁRADI, KATA LIQUIDITY RISK ON STOCK MARKETS Department of Finance Supervisors: Berlinger, Edina Ph.D., Lublóy, Ágnes Ph.D. Copyright © Váradi, Kata, 2012 Corvinus University of Budapest Doctoral Program in Management and Business Administration Liquidity Risk on Stock Markets Statistical analysis and possible applications of the Budapest Liquidity Measure Ph.D. dissertation Váradi, Kata Budapest, 2012 Liquidity Risk on Stock Markets Table of contents Introduction..................................................................................................................... 2 I. The order book ............................................................................................................ 8 1. Trading on stock exchange......................................................................................... 8 1.1. The mechanism of price-determination ............................................................... 13 1.2. Quote driven markets........................................................................................... 16 1.3. Order driven markets ........................................................................................... 16 2. The statistical attributes of the order book ............................................................ 22 2.1. Attributes of order prices ..................................................................................... 24 2.2. Shape of the order book ....................................................................................... 25 2.3. Attributes of order volumes ................................................................................. 26 2.4. The distribution of different orders...................................................................... 28 2.5. Persistence of the transaction signs...................................................................... 28 2.6. Effect of the supply and demand on the returns .................................................. 29 II. The Budapest Liquidity Measure........................................................................... 33 1. Basic concepts of market liquidity .......................................................................... 33 1.1. Dimensions of liquidity ....................................................................................... 35 1.1.1. Static dimensions ........................................................................................ 36 1.1.2. Dynamic dimensions................................................................................... 37 1.1.3. Diversity...................................................................................................... 38 1.2. Indicators of liquidity........................................................................................... 39 1.3. Liquidity indicators based on the Xetra Liquidity Measure ................................ 41 2. Empirical research: analysis of Budapest Liquidity Measure.............................. 48 2.1. Research on the Budapest Stock Exchange for the time being............................ 48 2.2. Database............................................................................................................... 52 2.3. Research question ................................................................................................ 53 2.4. Research methodology......................................................................................... 56 2.5. Results.................................................................................................................. 59 2.5.1. Average BLM values of the BUX shares ................................................... 59 2.5.2. The relation between BLM and other liquidity indicators.......................... 64 2.5.2.1. Relationship between liquidity indicators.......................................... 72 V Liquidity Risk on Stock Markets 2.5.2.2. Relationship between liquidity and turnover based on intraday data.76 2.5.3. Relationship between volatility and liquidity..............................................80 2.5.4. Time series of BLM.....................................................................................83 2.6. Conclusion............................................................................................................85 III. Liquidity adjusted Value-at-Risk..........................................................................88 1. Literature of the LAVaR models .............................................................................89 1.1. Models considering exogenous liquidity risk.......................................................93 1.2. Models considering endogenous liquidity risk.....................................................95 1.3. Transaction or volume based models ...................................................................98 1.4. Stochastic time horizon models..........................................................................100 1.5. Price impact function based models...................................................................101 1.6. Testing practical applicability of the models......................................................101 2. Empirical research: building an own LAVaR model...........................................104 2.1. Research method ................................................................................................104 2.2. Value-at-Risk calculation ...................................................................................106 2.3. Liquidity adjusted returns...................................................................................106 2.3.1. Determining the return for a single stock..................................................107 2.3.2. Determining returns of an equal volume stock portfolio...........................109 2.3.3. Determining returns of an equal value stock portfolio..............................110 2.4. Relative liquidity impact ....................................................................................112 2.5. Diversification ....................................................................................................112 2.6. Results ................................................................................................................113 2.6.1. Single stocks..............................................................................................113 2.6.2. Portfolios ...................................................................................................118 2.7. Conclusion..........................................................................................................121 IV. Virtual price impact function...............................................................................123 1. Literature of the price impact functions ...............................................................123 1.1. Value of price impact based on empirical research............................................123 1.2. Virtual and empirical price impact functions .....................................................124 1.3. Marginal supply-demand curve..........................................................................129 1.4. The shape of the price impact function: empirical facts.....................................131 1.5. Time-variation of price impact...........................................................................139 1.6. Theoretical modeling of the price impact...........................................................140 VI Liquidity Risk on Stock Markets 2. Empirical research: estimation and analysis of the price impact function ....... 143 2.1. Research questions............................................................................................. 143 2.2. Research method................................................................................................ 144 2.3. Estimating virtual price impact function............................................................ 145 2.4. Analysis of the time series of the virtual price impact function ........................ 151 2.4.1. Descriptive statistics ................................................................................. 151 2.4.2. Trend......................................................................................................... 154 2.4.3. Volatility and correlation in the time series.............................................. 158 2.4.4. Outliers and structural breaks ................................................................... 160 2.4.5. Mean-reverting.......................................................................................... 164 2.5. Conclusion ......................................................................................................... 165 Summary...................................................................................................................... 167 References.................................................................................................................... 175 Own publications ........................................................................................................ 188 VII Liquidity Risk on Stock Markets Index of tables Table 1: Trading systems.............................................................................................12 Table 2: The order book ..............................................................................................17
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